2007-07-20

The Economist refuses to understand Peak Oil

I was a big fan of The Economist for a number of years. I used to get it delivered, despite the hefty price tag attached to it. There were three reasons why this British "newspaper" (even though it is a magazine published weekly, they consider themselves a "newspaper") lost respect in my eyes. The first was their rosy predictions of the world economy in 2001... a year which contained a nasty recession. The second was their support of Bush's invasion of Iraq.

The third is their refusal to understand or at least deal with Peak Oil theory. I lost my respect for The Economist in a period when I discovered that their oil production figures implied that world oil supplies were safe for many decades.

This weekend's Economist has an article entitled The visible hand on the tap which looks at rising oil prices and supply. Look at the following quote (in reference to oil shortages):

This time around, however, facts have replaced fears: the world is consuming more oil than it is producing.

So, has The Economist embraced Peak Oil? Is it now admitting that oil production rates are dropping because the world's oilfields have "peaked"? No. This is the next sentence:

Last summer, as stocks started to rise, Saudi Arabia began cutting back its production. These cuts were formalised, and extended, at subsequent summits of the Organisation of the Petroleum Exporting Countries (OPEC). As a result, OPEC's members are now producing roughly 1m fewer barrels per day (bpd) than they were this time last year. Meanwhile, global demand has risen by over 1m bpd, to over 84m. The inevitable result is falling stocks, at a time when they would normally be rising.

So, who is to blame? It's the nasty OPEC countries who have "cut back production", that's who!

The problem is that "cutting back production" is one possible answer to the problem of lower oil supplies. Another possible answer is that OPEC nations have the tap open as wide as possible... but less oil is coming out.

In March this year I wrote an article entitled "We've probably peaked". Based upon information I read at The Oil Drum, it is clear that Saudi Arabia (the world's largest Oil producer) has produced less oil in 2006 than it did in 2005. At the same time, Saudi Arabia has invested heavily in oil rigs and other oil extraction equipment throughout 2006 (doubling their oil rigs). Why suddenly build so much extraction equipment - especially when oil prices have been so high for so many years? Moreover, why is it that such extraction equipment has not resulted in an increase in production? The most plausible explanation is that Saudi Arabia has peaked, and that their reduced oil production is due entirely to geological reasons.

One of the revelations that occurred to me when I first understood Peak Oil is that oil production is affected by geology. No matter how many pumps or rigs or pipes are built over/into an oil field, once that field is half empty, oil takes longer amounts of time to come out. Economically, this is a vital thing to understand, since there is an exogenous "force" acting upon the normal supply/demand model that is generally accepted. Yet this information has not reached the marketplace yet, or at least the "experts" who write for The Economist. In many ways I can understand them - if you are ignorant of certain facts, you stick by your "proven" models. In this case, the belief is that oil can always be extracted and produced at a speed that matches demand.

So what is The Economist's reaction to the current oil price problem?

It is not in their (OPEC's) collective interest to derail economic growth or destroy demand for their wares. If they thought the oil price was high enough to do real damage, it would make sense for them to expand production. Unlike last year, they now have roughly 3m bpd of spare capacity they could tap. But such reasoning assumes the cartel is more predictable than the hurricane season or the politics of the Middle East.

So there you have it - if high oil prices destroy the world economy then it is because OPEC are a bunch of unpredictable Arabs who can't be trusted. But, hopefully, this won't happen because OPEC probably believes it can get away with the current price without destroying demand.

Economics is based upon human behaviour - but human behaviour is unreliable and dangerous when it relies upon false information. The science behind Peak Oil is sound. If the marketplace... if people... were aware of the truth of Peak Oil, then the market would react in ways to mitigate it. However, since time is no longer on our side, the market's non-acceptance of Peak Oil becomes more and more dangerous as the days, weeks and years go by. The longer it takes the market to accept Peak Oil, the harder will the fall be, and the more panicked will be the reaction.

1 comment:

Then Maxine attended the "Smart conference 2007" 3 days later, where she introduced Dr Roger Bezdek who helped co-write the "Hirsch Report".

50 minute video of Bezdek speech here, with Maxine introducing.

http://tinyurl.com/2fxrnn

My point?

Even fresh new idealistic politicians like Maxine McKew will not mention peak oil in an election year. If she was paying attention during the Bezdek brief she knows.

He was very clear.1. Peak production will be reached in the next decade and thereafter decline - forever.2. Even if the extreme optimists are right and there's an extra TRILLION barrels, it only buys us 10 more years because of exponential growth in demand.3. Nothing is ready to replace oil without a 20 year big government transition program.4. A Great Depression is the most likely outcome, with some even nastier scenarios if things get funky. (EG: He did not mention "The Carter Doctrine" but hinted at international relations difficulties once the oil price super-spikes.)

It's surreal. It feels as strange as believing an Alien abducted me or something equally as bizarre, yet it is the cold hard science of the physics of oil extraction.

Strange days indeed.

BTW — "Difference of opinion" this Thursday will be covering what to do when the oil declines.